Naming Beneficiaries to your Investment Accounts

Whether it's buying a car, taking out a loan, purchasing a home, or opening investment accounts, paperwork just never seems to be any fun. Rushing through the stack without any thought to what you're signing can be tempting, even though common sense tells us that this is a big no-no.

One area I wanted to highlight where investors should pay extra attention when completing paperwork is the 'beneficiary designations' section. As it relates to your registered investment accounts the beneficiary is the person who inherit your accounts if you die. Upon opening an investment account you'll be asked to designate one or more beneficiaries. (If you do not name one, your investments default to your estate). Beneficiaries are only listed for registered investment accounts (RRSP, TFSA, LIRA, RRIF, LIF etc.)

You can really name anyone as your beneficiary, however, in today's article we'll highlight some the considerations you should think about in order to name the right beneficiary depending on the type of registered investment account you're opening.

RRSPs

With RRSPs, naming a spouse, common law partner, financially dependent child (under 18), or a disabled child or grandchild, allows money to be transferred tax free to the individual listed.  If anyone other than those I've listed is named as beneficiary, the money ends up being paid to the named beneficiary, while the estate is still on the hook for the taxes.  If the beneficiary named is not one of the individuals listed above, there really is no tax benefit to listing them as your beneficiary.  However, what it does allow is the avoidance of costly probate fees on the assets. The assets will skip probate and go directly to the listed beneficiary.

RRIFs

For a RRIF, there are two choices to select when deciding where the funds will go; naming a beneficiary or naming a 'successor annuitant'. Similar to RRSPs, if the beneficiary listed is your spouse, dependent child/grandchild (under 18), or disabled child/grandchild, a tax fee transfer of the RRIF account can be made either to an existing RRSP or RRIF.  The beneficiary can be anyone, but just as the case with an RRSP, if the individual is someone other than those I've listed, they will receive the proceeds and the estate pays the taxes.

In either case the original RRIF account is closed out, investments sold, and funds are transferred to accounts owned by the beneficiary. Only a spouse or common law partner is allowed to be a 'successor annuitant'.  The key difference with the 'successor annuitant' designation is that the investments transfer 'in kind' (as is) to the surviving spouse who will continue to receive the RRIF payments in place of the deceased spouse.  In this case the original RRIF actually remains open with the surviving spouse receiving the RRIF payments based upon the deceased's age and the amount of assets in the account.

TFSA

TFSA accounts also have two options upon death of the account holder; naming a beneficiary or a 'successor annuitant.' Identical to the RRIF, the 'successor annuitant' must be your spouse or common law partner.  Upon passing, the survivor will receive the investments 'in kind' and the account remains a TFSA, meaning the assets can continue to accumulate tax free.

A beneficiary, which can be anyone, will receive the amount without the estate being taxed but unless the individual receiving the funds has TFSA contribution room, any capital gains, dividends, or interest from the investments will be taxed in their hands moving forward. I've provided an easy to read chart below that summarizes the designations and their ability to defer tax further.

*Taxes CAN be deferred if the beneficiary is a spouse or common law partner, a financially dependent child/grandchild (under 18), or a disabled child or grandchild.

*Transfer is tax free, but proceeds are no longer a TFSA.

As you can see, there are tax benefits to naming your spouse, dependent or disabled child/grandchild as your beneficiary to your registered investment accounts, however it is not required. What is important is that you take some time to think about who should be listed as your beneficiaries for each account.  Far too often this decision is made quickly or not at all, which can come with some unintended consequences.  

It's also important to mention that along with reviewing wills, reviewing your beneficiaries for your investment accounts is equally important to ensuring that your wishes are carried out the way you intended.

- Brandt Butt, Investment Advisor

Brandt Butt is an Investment Advisor at award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.